Romania: Is the mid-year budget deficit out of control?

Things seem to have deteriorated a bit on the fiscal policy front as the mid-year budget execution doesn’t leave much room to manoeuvre for the rest of 2019. Last time the consolidated budget came close to this figure was in 2011. In fact, so far in 2019, both the deficit numbers and execution pattern seem to resemble 2011 when we closed the year with a budget deficit of 4.2% of GDP.

The nominal deficit stands at RON19.9 billion. This means that if it were to stay within the 3.0% deficit limit, the government has just under RON11bn of deficit spending left for the remaining six months of 2019 (we took into account the official nominal GDP forecast of RON1031mn). Expenses, however, are about to increase, starting 1 September 2019, by about RON2.1bn per month - destined for the already approved 15% pension increase. This leaves very little fiscal space. So where will the money come from?

As usual, investments are likely to take a hit. Capital spending at mid-year stands at RON7.9bn and is projected to reach around 4.6% of GDP this year, or c.RON47bn. Given that in the last three years, the share was broadly constant around 2.5%, we seriously doubt that this year’s target will be reached. We think that between 1.2% and 1.7% of GDP will be saved by cutting these expenses. But still, a bit more (we estimate c.0.3-0.6% of GDP) is needed. Where from?

Most likely a patchwork of measures will kick in again and we will see a bit of everything: SOE’s special dividends, VAT reimbursement delays, less impetuous year-end spending among other things. More ample measures are being discussed as well, such as taxing special pensions, increasing tobacco excises earlier than planned and a special tax on sugary drinks. The budget revision due this month will bring more clarity on how the government plans to remain within the 3.0% deficit limit.